Political bashing of electric deregulation is just plain wrong

by Ray PerrymanMidland Reporter-Telegram

Published 6:00 pm, Saturday, February 27, 2010

Election season is here, and political posturing is inescapable. The inevitable bashing of everything that's happened on the current watch has begun. Sometimes it's justified; sometimes it's just plain wrong.

One of the latter involves something I've studied for decades — electric power prices in Texas. Contrary to what you may hear, competition in the electric power industry was a smart move for Texas. Let me set the record straight.

Furthermore, the numbers of retail electric providers (REPs) and plans continue to increase. In 2006, the average consumer had access to about 17 retail electric providers offering around 36 different rate plans. Today, residential customers have approximately 30 REPs offering more than 140 different rate packages.

In terms of another major benefit of competition — better pricing — Texas is also winning. Some point to the fact that average prices are up since competition was introduced. What they fail to mention, though, is that so are prices for most everything else.

In December 2001, the average price of a loaf of white bread in a southern urban city was 93 cents but rose to $1.32 in December 2009. A gallon of milk increased from $2.97 to $3.29. A gallon of unleaded gas climbed from about $1.02 to around $2.50 during the same time.

The point is simple. Things generally cost more today than they did almost a decade ago.

Without competition, there's plenty of evidence that electric prices would be even higher than they are today. But, because consumers have the power to hire and fire their electric provider, companies are forced to compete and customers are better off than they would be in a price-regulated world.

Understanding the link between electricity prices and the cost of fossil fuels is critical. In Texas, natural gas provides roughly 60 percent of the state's generating capacity and nearly half of electricity actually consumed; thus, natural-gas-fired power plants set the market price of wholesale power the majority of the time (in a competitive market, the cost of the last incremental unit determines the price).

The monthly natural gas price in January 2002 was $2.19 per million cubic feet (mcf), and spiked as high as $12.78 during the summer of 2008. Even so, competition mitigated the effect of this dramatic rise in the cost to produce electricity.

Natural gas prices increased a remarkable 148 percent from 2002 to 2006, but Texas electric prices only rose 36 percent. After a slight dip in price from 2005 to 2006, the cost of natural gas increased again by 26 percent through 2008 while Texas electric prices declined slightly.

When the Public Utility Commission of Texas set rates, it did so to reflect fuel costs through a formal rate-setting process. Several reports demonstrate that the traditional rate making mechanism would have resulted in higher prices than those in the competitive framework, and it is readily apparent that competition served as a notable restraint on prices during the past few years. More recently, reductions in fuel prices have brought lower electricity costs in the competition market.

Today, competitive offers in Texas are below the state's average price. More specifically, the lowest available price in Dallas-Fort Worth is 8.2 cents a kilowatt-hour. In 2001, the regulated rate was 9.7 cents. In Houston, the lowest available price is 8.8 cents a kilowatt-hour. In 2001, the regulated rate in the Houston ara was 10.4 cents. Today's prices are lower than they were before competition was introduced, while the Consumer Price Index in Texas has risen about 19 percent over the same period.

Customers can now shop around for the best price and the best service. They can use other criteria to pick their electric provider. They also have a growing range of tools to help them use electricity more efficiently so that they can use less and save more. This is precisely the type of innovation that markets foster.

There is no doubt that the prices we paid for many goods and services almost 10 years ago were lower than they are today. However, when it comes to electricity prices, competition has worked to keep prices in Texas lower than they would be otherwise. And in the end, that's the comparison that matters.

Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.